Cost Basis for Determining the Capital Gains or Losses

March 29, 1990 BIR RULING NO. 046-90 4 (e) (2) (A) 000-00 046-90 Gentlemen : Reference is made to BIR Ruling No. 24(e)(2)(A)-000-00-264-89 dated December 19, 1989 to the effect that since your 70% stockholdings consisting of unlisted shares which have a book value of P245.00 per share is being sold for P260.00 per share, you will therefore realize a capital gain of P15.00 per share which is subject to the capital gains tax imposed under Section 24(e)(2)(A) of the Tax Code. In connection thereto, please be informed that after a restudy of the above ruling, this Office finds the same devoid of legal basis. Pursuant to then Section 35(a) [now Section 34(a)] of the Tax Code, as amended, the gain (tax base) from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis or adjusted basis for determining gain and the loss shall be the excess of the basis or adjusted basis for determining loss over the amount realized. The amount realized from the sale or other disposition of property shall be the sum of money received plus the fair market value of the property (other than money) received. (As amended by E.O. 137) Thus, for purposes of determining the selling price in the case of sale, transfer or exchange of shares not listed in the stock exchange, the same shall be valued at their book value nearest the valuation date. The book value of the unlisted shares of stock shall be prima facie considered as their fair market value. However, if there have been previous bonafide sales/exchanges of the unlisted shares of stock, the price at which these shares exchanged hands should be taken/ considered as its fair market value. (Sec. 6(a)(3), Revenue Regulations No. 2-82) Moreover, under Section 6(b) of Revenue Regulations No. 2-82, the cost basis for determining the capital gains or losses shall be the basis as determined in accordance with the provisions of Section 35 (now Section 34) of the Tax Code, as amended, and its implementing regulations applied in the following manner: (1) If the stocks can be identified, then the cost shall be the actual purchase price plus all costs of acquisition such as commission, documentary tax transfer fees, etc. (2) If the stocks cannot be properly identified, then the cost to be assigned shall be computed on the basis of the first-in, first out (FLFO) method. However, (3) If books of accounts are maintained by the seller where every transaction of a particular stocks is recorded, then the moving average method shall be applied rather than the first-in, first-out (FIFO) method. (4) In all cases, stock dividend received must be assigned a corresponding cost by allocating the original cost of acquisition to the total number of shares composed of the original shareholdings plus the number of shares of stocks received as stock dividend. In other words, the gain or loss from a sale or other disposition of property is measured by the difference between the amount realized and the adjusted basis of the property disposed of. (par. 1703, p. 425, Chap. 17, (1989) U.S. Master Tax Guide) Such being the case, contrary to the aforementioned ruling, the difference between your selling price of P260.00 per share and the original acquisition cost or adjusted cost basis of said share shall constitute the net capital gain subject to the capital gains tax imposed under Section 24 (e)(2)(A) of the Tax Code as amended: aisadc This revokes BIR Ruling No. 24(e)(2)(A)-000-00-264-89 dated December 19, 1989. Very truly yours, (SGD.) JOSE U. ONG Commissioner